AMR Takes ‘Long-Term Survival’ Step With Airbus-Boeing Order

American’s Boeings will include 100 of a new version of the 737 with revamped engines. Photographer: Andrew Harrer/Bloomberg

July 20 (Bloomberg) -- American Airlines parent AMR Corp.
is counting on savings from 460 new, fuel-efficient jets and $13
billion in planemaker financing as the third-largest U.S.
carrier struggles with losses in 10 of the past 12 quarters.

“AMR had to make a bold move,” Ray Neidl, a Maxim Group
analyst, said today in a note to investors. “These moves in our
opinion are not only positive for the company’s future but are
necessary for its long-term survival.”

While Fort Worth, Texas-based AMR was little changed as the
Bloomberg U.S. Airlines Index fell 1.3 percent, analysts such as
JPMorgan Chase & Co.’s Jamie Baker in New York questioned how
Boeing Co. and Airbus SAS jets would help a carrier that lags
behind the rest of the industry in returning to profit.

“When enterprises lose money by such a wide margin
relative to peers, one would normally expect a material cost-reduction program and/or aggressive top-line strategy,” Baker
told clients in a note. “We see neither in the case of AMR.”

The record jet order, with 260 from Airbus and 200 from
Boeing, will allow American to retire some of the oldest planes
in U.S. fleets. The new aircraft will have a list value of about
$38.5 billion based on average prices, and the deal includes
options and future purchase rights for 465 more.

Manufacturers’ financing for the first 230 jets was more
than AMR “would otherwise be able to raise effectively on our
own,” Chief Executive Officer Gerard Arpey told employees in an
e-mail.

All-Boeing Fleet

Until today, American hadn’t placed an Airbus order since
1987. The carrier retired its last Airbus model, the A300 wide-body jet, in 2009 as part of a step to trim costs by maintaining
a fleet drawn from just one planemaker.

AMR President Tom Horton described the Boeing and Airbus
orders as two transactions, “not a split deal.”

“Our thinking evolved over the course of the process,”
Horton said in a Bloomberg Television interview. “Once we saw
how much how much financing was brought to bear, we concluded
that the best course of action was to do both deals.”

AMR fell 1 cent to $4.92 at 4 p.m. in New York Stock
Exchange composite trading. The shares have tumbled 37 percent
this year, with AMR the only major U.S. airline company
projected to show a 2011 loss, based on analysts’ estimates
compiled by Bloomberg.

737 Upgrade

American’s 737s will include 100 of a new, as-yet-unnamed
version with upgraded engines, making the airline the first
customer for a model that Boeing’s board will consider in
August. The Airbus jets will be A320s, split between the current
model and the so-called neo with new engines.

“We understand that American’s fleet (and brand) are
tired, but this announcement represents a ton of new capital
being put into a failing business model,” Kevin Crissey, a UBS
AG analyst in New York, said in a note to investors. “We hope
management is able to reassure the Street that profits are
imminent to support this level of expenditure.”

Financing from Airbus and Boeing shows the planemakers’
confidence in AMR’s strategy to return to profit and gives the
carrier breathing room while repairing its balance sheet, said
Vasu Raja, American’s managing director for corporate planning.

The order allows for a “very radical transformation” of
American’s business, Raja said in an interview.

Second-Quarter Loss

AMR said today that its second-quarter loss widened to $286
million, or 85 cents a share, from $11 million, or 3 cents, a
year earlier. The loss exceeded the average estimate of 81 cents
among 13 analysts surveyed by Bloomberg.

American stayed on the sidelines in the past three years as
Delta Air Lines Inc. bought Northwest Airlines in 2008, United
Airlines and Continental Airlines merged last year to become
United Continental Holdings Inc. and Southwest Airlines Co.
acquired AirTran Holdings Inc. in May.

Those transactions dropped American to third in the U.S.
industry by traffic, a disadvantage in an industry where large
route networks are more attractive to corporate-travel clients.
The deals also thinned the ranks of potential consolidation
targets for AMR.

“American management recently has been criticized for
being ‘asleep at the switch’ and only reacting to
developments,” Maxim’s Neidl said.

While today’s move “demonstrates that they are thinking of
the future,” AMR’s work isn’t done, Neidl wrote. “Management
has to do something in the short term to stem losses. Longer-term, they may need a merger partner.”